Dragon Tiger Gate is a martial arts academy established by two powerful martial artists. The academy aims to train and equip students with martial arts in order to uphold justice and combat the threat of the triad gangs in a seemingly lawless world. The academy is also a haven for children who had been orphaned as a result of triad activities.
The story begins with the two sons, who were born to different mothers, of Wong, one of the founders of the academy. The elder son is named "Dragon" and the younger one is named "Tiger". When the boys were still young, Dragon's mother left the academy and gave Dragon half of a jade amulet pendant and told him that his half-brother Tiger has the other half of the pendant. When Dragon's mother was killed in a fire, Dragon was taken into the care of triad boss named Ma Qwun and he grew up to become Ma's bodyguard. Ma Qwun's gang is a subject of the evil Luocha Gate.
Several years later, Tiger and his friends are dining in a restaurant and encounter Ma Qwun and his men, who are receiving the Luocha Plaque. The Luocha Plaque is a symbol of authority within the Luocha Gate and indicates that the holder is second only to the Luocha Gate's leader Shibumi. Ma Qwun and the leader of the White Lions Gang wee arguing over the Plaque when Tiger interrupts and starts a fight with the gangsters. They manage to seize the Plaque. Just then, Dragon appears and fights with Tiger, whom he does not recognise to be his half-brother. Ma Qwun calls for Dragon to pull back.
Later that night, Dragon confronts Tiger and his friends at a Japanese restaurant to take back the Plaque. Tiger and his friends have been drugged by Scaly, another of Ma's lackeys, who also wanted to seize back the Plaque to prove to his boss that he is the better man. Scaly and his followers fight Dragon over possession of the Plaque. Turbo Shek, another diner at the restaurant, is aroused by the commotion and he joins in the fight on Dragon's side. Dragon and Turbo defeat Scaly and his men and Tiger takes back the Plaque from Dragon. Just then, he discovers that Dragon has the other half of the jade amulet pendant and realises that Dragon is actually his half-brother.
Turbo follows Tiger back to Dragon Tiger Gate and wants to be enrolled into the academy to improve his martial arts. He is refused by the current leader of the academy, Master Wong Fuk Fu for his arrogance. Dismayed, Turbo waits outside the academy and promises not to leave unless he is accepted in as student. Wong agrees to spar with Turbo and defeats Turbo easily. Turbo is humbled and accepted by Wong as a student.
Meanwhile, Ma Qwun returns the Luocha Plaque to signify his retirement. He is supported by Dragon, who wants to return to Dragon Tiger Gate, and his daughter Ma Xiaoling, who wants a simple life. Shibumi sees this as an insult and sends his henchmen, the Double Devils, to kill Ma Qwun. He uses his subordinate Luocha to lure Dragon away while his minions kill Ma Qwun. Dragon realises that he had been tricked and return to rescue Ma but it is too late. Dragon slays the Double Devils after a vicious fight and leaves Ma Xiaoling in his brother's care before leaving.
Shibumi was impressed with Dragon for defeating his henchmen and goes to Dragon Tiger Gate to issue a challenge. With Dragon not present, Master Wong, Tiger and Turbo takes on Shibumi's challenge but were utterly defeated. Wong is killed by Shibumi while Tiger and Turbo are severely wounded. Ma Xiaoling brings Tiger and Turbo to Mount Baiyun to seek help from Master Qi. Qi heals the wounded Tiger and Turbo, and teaches them new martial arts techniques to fight Shibumi.
Tiger and Turbo storm into Shibumi's Black Pagoda to stop him from committing evil acts once and for all. Although their martial arts abilities have greatly improved since the last time they fought, they are still not Shibumi's match. At the critical moment, Dragon appears and fights Shibumi, eventually defeating him. Before the film ends, Dragon returns to Dragon Tiger Gate together with Tiger and Turbo.